Never in America … has there been a matter requiring more good judgment or more vigilance, or demanding a clearer and more thorough examination.”¹

José Martí's observation on the first effort by the United States to unite both Americas at the Pan-American Congress in 1889 is relevant again today. Efforts to unite the two hemispheres are underway with the proposal to create a Free Trade Area of the Americas and the flurry of preliminary bilateral and regional trade agreements that the Bush Administration has been pushing in Latin America. It appears that Latin American leaders have taken the quote to heart—most trade negotiations now focus on forming a united regional front. The aim of “regionalization” is to unite countries in Latin America into small groups prior to their integration into a larger, hemisphere-wide trade bloc.

Why does this matter? On the surface, it appears that the growing interest in regional alignment might be intended to simply counterbalance the United States' negotiating strength. Digging deeper, though, we find that the push to strengthen regional ties may be the foundation on which far-ranging improvements in economic and social conditions will be built. As Latin America calls into question Washington's views on trade liberalization, it may come to rely more heavily on regionalization to open markets for trade and improve economic conditions. If integration occurs in conjunction with much-needed legal reforms (particularly with regard to tax policies), regional governments have the opportunity to greatly reduce inequality and fight poverty.

Latin Americans have generally gotten the short end of the stick when it comes to trade talks, particularly when one takes into account such distortionary polices as the U.S. Farm Bill. No amount of goodwill on the trade front can make up for the losses that accrue to Latin American farmers because of the subsidies that the U.S. government provides its farmers.²

Yet many of the region's governments hope to align with the United States (either through a bilateral or a multilateral trade agreement) for perceived benefits—access to the large U.S. market will boost exports, which will spur domestic production and increase jobs while bringing in hard-currency earnings.

The region's leaders hope that all this will translate into economic growth. On closer inspection, though, it is painfully obvious that Latin American leaders will probably not be able to secure the advantages they seek by linking up with the United States. Note the requirements for entrance to the Dominican Republic–Central America Free Trade Area, made up of the U.S., Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.³

Costa Rica, for example, must allow foreign (read U.S.) investment in its traditionally state-owned sectors, in particular, telecoms and insurance. The U.S. rationale for this requirement was that state-run enterprises are monopolies—inefficient and costly to maintain—and should be dismantled. Yet the Costa Rican firms are for the most part well run and profitable.⁴ The Costa Rican negotiators held firm for some time against the U.S. request, but when the other nations resolved to continue with or without them, the Costa Ricans backed down and agreed to allow foreign investment in their state-dominated industries.⁵

It is in light of distortionary tactics like this that the trend toward regionalization has sparked renewed interest. A new breed of Latin American politician appears poised to tackle these problems, and not in the traditional framework of reliance on the developed world. The fact that trade flows are asymmetrical—with the developed country, in this case the United States, doing most of the exporting because tariffs or subsidies aimed at protecting domestic industries prevent much importing—has served to harden Latin American sentiment with regard to the United States' ideas of trade liberalization. These new popular, left-leaning leaders are looking to one another for markets, labor, and capital, and regional free trade movements are becoming much more popular than overarching schemes like the Free Trade Area of the Americas.⁶

Over the past several decades, Latin American politicians have embraced all sorts of economic programs, from domestically sponsored import substitution development programs to internationally funded structural development programs. The results have been mixed. Measurements of development—whether by GDP growth, inflation and unemployment rates, or social indicators, such as infant mortality rates—have failed to satisfy either the domestic or the multilateral players. Though scholars do not agree on the root causes of the region's inability to improve social and economic conditions, few dispute that a combination of domestic and international factors are to blame.

Following the onset of the 1980s debt crisis, local leaders became convinced that the way to prosperity and economic stability was to embrace free trade more fully. An added benefit would be improved social conditions as production for export increased. Increased production, in turn, would raise employment levels, raise salaries, and improve living standards. As Latin America became fully immersed in global trading, problems that have persisted for centuries—most importantly inequality—would finally be addressed.

Fitting into the global trading system became the central idea for most Latin American development schemes at this time. Thus macroeconomic reforms geared toward improving the functioning of domestic markets, tariff reduction, and increasing incentives for private sector initiatives began to take precedence over other development policies. Economic growth became dependent on Latin America's seeming commitment to integration in the global economy. However, the continued persistence of commodity-based export production and the lack of export-quality industrial production have highlighted the fact that Latin America's growth is not sustainable in the face of global financial crises.⁷

The limited nature of domestic consumer markets coupled with distortionary policies in target markets further compounded the region's painful vulnerability to external conditions. Falling commodity prices (pushed further downward by protectionist policies in the developed world) and falling demand crippled much of the developing world. As income from commodity exports dipped, individuals' ability to import capital goods also fell, resulting in a vicious spiral that adversely affected employment, production, and poverty levels. Inequality increased; the latest research indicates that the richest tenth of Latin Americans earn 48 percent of total income, while the poorest tenth earn just 1.6 percent.⁸ Latin America, much like the rest of the developing world, came to see that diversifying exports, expanding industry, and improving social conditions are much more important than tariff reductions and liberalized trading schemes for integration in the global market—thus the increased momentum toward regionalization.

The creation of Mercosur on March 26, 1991, by the Treaty of Asunción,⁹

signaled the beginning of a new era for trade in Latin America. Linking Argentina, Brazil, Paraguay, and Uruguay—and eventually allowing for the free movement of goods, labor, and technology in those countries—was, at the time, considered revolutionary. By 1994 the countries had agreed on an institutional framework for Mercosur (according to the Ouro Preto Protocol), and a common external tariff had been instituted. Progress seemed to be on schedule with regard to the stated aims of liberalizing tariff and nontariff trade barriers, harmonizing trade policy rules, addressing common issues such as transportation, infrastructure, services, and policy coordination, and creating an environment for sustainable development and social justice. Tariffs were being lowered, and countries were beginning to consult one another on macroeconomic policy. While far from making policy decisions in concert, the fact that these countries were discussing policy was admirable. Within each country, local politicians were able to harness globalization rhetoric to convince domestic producers that lowering intraregional tariffs would benefit domestic production as exports within the region would increase. A persuasive argument for the creation of a small trade bloc was that such a regional movement would be a sort of stepping stone, allowing nations to harmonize trade among themselves in preparation for larger-scale integration. Though critics cited the possibility of trade diversion (that is, that member countries would shift their imports from more efficient, nonmember countries to less efficient partner countries within the trade group), politicians hoped that the benefits of increased intraregional trade would outweigh any negative effects (that is, that efficiency would improve when members imported more from lower-cost pact partners and reduced their own less efficient domestic production). In any event, Mercosur advocates cited the possibility of its becoming a building block for further regional integration, which would diminish overall the effects of trade diversion since more countries would be pact members and tariffs would be reduced.

Trade flows among the four full Mercosur members reached $18.5 billion in 1997, its highest level ever. Intraregional trade in Mercosur increased by 22.8 percent from 1986 to 1995. Individually, each country experienced similar growth rates in its share of intraregional trade; during this period, Argentina's trade with member countries increased by 20.8 percent, Brazil's by 26.2 percent, Paraguay's by 16.6 percent, and Uruguay's by 22.5 percent.¹⁰

Intraregional investment was also positively affected by trade liberalization and stable monetary conditions. Though intraregional investment had been minimal prior to the advent of the trade pact, privatization of state-owned industries helped to spark investor interest.

However, trade and investment flows within the region were severely affected by the 1998 financial crisis. Mercosur initially appeared able to withstand the unfavorable external climate, but by 1999 intraregional trade had begun to suffer. Leaders began to pay more attention to domestic calls for aid than to issues of common concern to the pact, and intra-Mercosur squabbling was intense. According to figures estimated by the Economic Commission for Latin America and the Caribbean, intraregional trade fell by 30 percent in the aftermath of the financial meltdown.¹¹

The repercussions of the international financial crisis triggered a debate on the relevance of coordinating key macroeconomic policies, in particular those geared toward attracting investments. As domestic concerns of member countries began to subvert the aims of the group (for example, Brazil's currency crisis in 1999 and Argentina's economic crisis in 2001–2), many feared that Mercosur had become a trade bloc in name only. Chile, which had long been courted to join Mercosur, decided instead to seek a bilateral trade accord with the United States—much to the chagrin of Argentina and Brazil. Yet, at the time, the decision seemed to make sense. Chile opted to align itself with an economic powerhouse, rather than suffer the slings and arrows of intra-Mercosur bickering.¹²

By 2001–2 the calls for a hemisphere-wide trade agreement—the Free Trade Area of the Americas (FTAA), spearheaded by the United States—began to gain support. The concept of a unified region—circulating since the time of Simón Bolívar—has long suffered from changing political concerns. Historically, unification talks have faltered on fears that stronger, more economically diverse nations would subvert the sovereignty and national identity of smaller countries. This time however, the proposal was not greeted with skepticism, but was viewed by Latin American political leaders as the new path in an era of global cooperation. Though several administrations (for example, the first Bush administration) had called for an FTAA-like arrangement, there was little regional support. But now Latin American policy makers began rallying support for what they believed would be an expansion of the North American Free Trade Area (NAFTA, made up of the United States, Canada, and Mexico) that would include all of Latin America. For the first time there were more supporters than opponents. This was a surprising development—Latin American leaders were not up in arms, decrying the invasion of their spheres by the traditional hegemon; rather, they were lining up to start trade talks. They began fawning over the Bush administration proposals, hoping to secure the best possible advantage over their neighbors. The decision to create the FTAA was viewed as a major step in cementing U.S. influence in Latin America.

In order to rally the cause, the current Bush administration made overtures to regional leaders. George W. Bush's first official presidential visit was to Mexican President Vicente Fox at his ranch in Guanajuato, breaking the tradition of honoring Canada with a first visit. In addition to the usual promises to increase trade and improve ties across borders, President Bush touched on a contentious issue in the United States: legalizing the status of Mexican immigrants. Though most observers knew that an immigration accord would be difficult, if not impossible, to get through Congress, the willingness of the Bush administration to at least address the issue was heartening to Mexico.

Similarly, in Chile, the Bush administration restarted stalled negotiations for a bilateral free trade agreement in order to secure Chile's adherence to the FTAA. The bilateral accord had been stalled since the first Bush administration, and Chile warmly regarded its completion. Following these events, at the Third Summit of the Americas, in early 2001, delegates from 34 countries agreed to set January 2005 as the deadline for finalizing negotiations for the FTAA.¹³

Heralded as an unprecedented agreement, the FTAA was to be the answer to the region's economic woes. The free movement of goods, technology, and labor was proposed as the solution to Latin America's economic stagnation and increasing levels of poverty and unemployment. The United States promised to put all issues on the negotiating table, including those policies that are viewed negatively in Latin America. The accord envisioned the eventual elimination of all tariffs (though this would not have to take place until 2015). Getting all 34 countries to agree was viewed as a miraculous feat. Unfortunately, this harmony was not to last.

Though trade issues were understandably postponed after September 11, 2001, other contentious issues had already begun to arise. The U.S. decision to impose steel tariffs, the passage of the 2002 Farm Bill, and unilateral action in the Middle East spurred the actions of regional leaders keen on taking a leadership role in negotiating trade accords. Another sticking point was Washington's proposal to impose stringent intellectual property rights that would far exceed requirements set by the World Trade Organization (WTO). U.S. negotiators began clamoring for limits to a nation's ability to issue compulsory licenses, which allow the local production of generic versions of drugs with or without the patent-holder's approval. Brazil, which successfully gained WTO approval to continue the practice, has long supported compulsory licensing. The United States also began calling for unlimited access to Latin American markets for services—claiming that in order for a free trade area to operate properly, all areas should be open to investment. After the United States refused to discuss issues such as agricultural subsidies, the presidents of Brazil, Mexico, and Chile began to seek intraregional alliances to counter the negotiating weight of the United States. And the push to regionalization began anew.

Argentina now looked within Mercosur for help in getting out of its crisis. In February 2002, Brazil announced the elimination of all barriers and quotas imposed in the past on the entry of Argentine exports to the Brazilian market.¹⁴

In return, Brazil asked Argentina to remove barriers and quotas it had imposed in 1999, following the devaluation of the Real. Additionally, the creation of intraregional production chains for export outside the region was given a greater push. Member state representatives decided to conduct joint trade missions to potential markets outside Mercosur—and a mission to China was held in early 2002. Trade issues that had been severe stumbling blocks, such as the automotive quota system between Argentina and Brazil, which negotiators had been formerly unable to revise, were tackled again with renewed vigor. The agreement to relax the quota system and allow the export of Argentine automobiles to Brazil and Brazilian automobiles to Argentina was announced in July 2002—a crowning achievement for the negotiating parties. Such concerted efforts to facilitate trade were viewed positively in the region and provided further impetus for the renovation of Mercosur.

Additionally, the emergence of politicians keen to secure domestic support, rather than backing from multilateral organizations, has further fueled the regionalization movement. Brazilian politician Luiz Inácio da Silva is a perfect example. Known affectionately as Lula, da Silva tempered his fierce labor rhetoric while campaigning for the presidency but effectively convinced the populace of his commitment to domestic economic improvement whether or not the international lending institutions (such as the International Monetary Fund) approved. Such statements were received with pleasure by Brazilian voters, which overwhelmingly elected Lula. Since taking office, Lula has implemented several far-reaching social programs, such as the Zero Hunger Plan, to provide monthly food subsidies to the poor. He has also advanced pension and tax reforms that attempt to distribute wealth more evenly in the largest country in Latin America. Stemming from these domestic successes, Lula has been able to strengthen his standing in Mercosur and throughout the region as a champion of the poor. His calls for regional integration have been widely accepted, and his stewardship at the Mercosur ministerial meetings has resulted in that body's expansion and deeper integration.

After a long stationary period, Mercosur's resurgent growth is indicative of the turn that regional trade agreements have taken. At a Mercosur ministerial meeting in December 2003, the Mercosur member nations signed an accord to begin free trade with the countries of the Andean Community and extended associate member status to Peru and Venezuela. The expansion fulfilled a promise to unite the two trading blocs that da Silva had made early in his presidency. At the same meeting, the president of Argentina, Néstor Kirchner, called for greater unity so that Mercosur could negotiate with the European Union and the United States from “a position of dignity.” Kirchner also outlined his desire to create regional integration on a framework of “strengthening human rights, fighting against corruption, combating social exclusion and not lowering arms against the powerful.”¹⁵

This renewed interest in strengthening intraregional trade has translated to concrete gains in the trade arena. According to data from the Economist Intelligence Unit, intraregional trade registered a strong increase in 2003 of some 60 percent over 2002, to an estimated $10 billion, though it has not yet recovered to the level of trade in 2001. Brazil's total exports increased by 21 percent to a record $73 billion, in 2003. Its sales to Argentina almost doubled compared with 2002, to some $4.6 billion (up by 94.7 percent). Argentina also regained its position as Brazil's largest single market outside the United States and ended 2003 ahead of China. As a whole, Argentina accounted for 6.2 percent of Brazilian exports (up from 3.9 percent in 2002), while the four Mercosur countries together accounted for 7.8 percent of Brazilian exports (up from 5.5 percent in 2002).¹⁶

In another surprising development, the central banks of six South American countries announced their intention to create a common futures market for their respective currencies. They hope thereby to ease foreign exchange uncertainty and boost regional trade. The new regional futures market will trade the currencies of the four members of Mercosur—Argentina, Brazil, Paraguay and Uruguay—as well as its associates, Bolivia and Chile. The de-dollarization of regional trade, which is expected to top $12.5 billion among the six countries in 2004, was first proposed in Brazil in 2003.¹⁷

Once the accord with the Andean Community and Mercosur goes into effect, all of the South American countries except for Guyana, French Guyana, and Suriname will have some sort of regional free trade agreement in place. (Agreements with nations thus far excluded will not likely be put off too long.) The region's leaders will be able to consolidate the strength of their combined trading bloc to enhance their position at the next round of FTAA negotiations. The potential for South America to become a major player in trade negotiations will be possible once subregional arrangements are proved solid. With internal bonds in place, the region's strength may be used to the best possible advantage in trade talks. More important, regional cohesion allows home-grown solutions to the problems of poverty and social inequality to emerge. If the benefits outlined above hold—that is, that growing trade stemming from free trade agreements in the region will lead to increased production, which will raise employment and salary levels and have a positive effect on other social indicators—then one can reasonably expect that increased trade will lead to greater equality. This would be a welcome added benefit from signing regional trade agreements—and one that is sorely needed. Just ask the poorest tenth of Latin Americans.